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President Obama, you and Speaker Boehner were unable to reach a big picture budget agreement last year. If you are re-elected and Mr. Boehner continues as Speaker, why should voters expect a different result over the next four years? Why shouldn’t Americans expect the budget stalemate just continue?

Separate but related, at some point I assume President Obama will say he inherited our current deficit problems. This is a little long, but it would be great to see Governor Romney respond like this:

Mr. President, for almost four years you have been telling us that you inherited huge fiscal problems, and you have told us that the past four years of trillion dollar deficits aren’t your fault. Why have you spent so much time complaining about who is to blame for our Nation’s deficit and spending problems and so little time solving them?

The budget you propose would accumulate another $6 trillion of debt over the next decade. The long-term budget problems are even more severe, and you still haven’t proposed a solution to them. Presidents are supposed to lead, and you have not.

Yes, we know that you want to raise taxes on the rich. You think the problem is that government doesn’t have enough money, so you propose tax increases. But if we did what you propose we’d eliminate only one-twelfth of next year’s deficit, and only one-sixth of our deficit ten years from now. I think the problem is that government is spending too much, and the obvious solution is to reduce the size of government.

If I am elected President, I will make reducing deficits and cutting government spending top priorities. I will propose a budget that solves our short-term and long-term deficit and government spending problems, and I will take all the energy that you have devoted to blaming someone else, and instead dedicate it to working with anyone, of either party, who will work me to solve the problem. I have already proposed several specific ideas, including changes to the major entitlement programs that drive our fiscal problems.

It is time to stop worrying about who gets blamed when things go wrong and start working on getting economic policy right.

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At almost every recent campaign stop President Obama has said a version of this:

Independent analysis shows my plan for reducing the deficit would cut it by $4 trillion. I’ve already worked with Republicans in Congress to cut a trillion dollars’ worth of spending, and I’m willing to do more.

Obama was getting fired up as he worked through what to say and how to say it. He wanted a $ 4 trillion deficit plan too, but the cuts were too severe. The progressive and liberal base would be deeply distressed.

Sperling suggested an old trick from the Clinton years: Stick with the $ 4 trillion— that was easy to understand— but instead of projecting it over the traditional 10 years, do it over 12. No one would really notice. Few would do the math. By stretching the plan out and loading most of the cuts into its final years, the early cuts were substantially smaller.

I did the math. When President Obama rolled out his $4 trillion number in an April 2011 speech I wrote:

$4 trillion in deficit reduction over 12 years does not “match” $4 trillion in deficit reduction over 10 years. It’s not even close.

The twelve year timeframe is a red flag. Federal budgets are measured over 1, 5, and 10 year timeframes. Any other length “budget window” is nonstandard and suggests someone is playing games.

… In this scenario, $4 trillion of deficit reduction over 12 years translates into about $2.8 trillion over 10 years.

Under the administration’s estimates, the president’s framework saves $2.9 trillion over 10 years and $4 trillion over 12 years…

Mr. Woodward’s book confirms my analysis and attaches intent to President Obama’s $4 trillion claim. If Mr. Woodward has it right, President Obama is intentionally misleading you by using this $4 trillion number (while remaining technically correct since he is not now specifying a timeframe).

In total, deficit reduction over the coming ten years (fiscal years 2013-2022) — through a combination of the proposals in the budget and measures enacted in 2011 — would equal about $3.8 trillion, not counting savings from reductions in costs for the wars in Iraq and Afghanistan, according to Table S-3 in the President’s budget.

At first glance it appears this supports the President’s “$4 trillion” number, and may even support a claim of $4 trillion of deficit reduction over 10 years rather than 12. But when we look more carefully:

We see that Table S-3 in the President’s budget is titled “Deficit reduction since January 2011.” The President is, as Dr. Greenstein acknowledges, counting deficit reduction already enacted into law as if it were part of a new deficit reduction proposal.

At the same time as the Greenstein statement I wrote about this table, separating out past from proposed future deficit reduction. I came up with $2.764 T of new deficit reduction over 10 years, which is again consistent with the White House’s earlier statement of $2.9 T over 10 years and $4 T over 12.

Even my $2.764 T is too generous. When you drill down into the details the Administration takes credit for savings that really shouldn’t count. Any measure of deficit reduction is vulnerable to baseline gaming. You should always be wary of claims of deficit reduction.

Let’s return to the President’s quote, which I emphasize he is saying at almost every campaign stop this month. President Obama is boasting about “independent analysis” that simply cites a number from a table in the President Obama’s budget. This is, to me, a new definition of “independent.”

President Obama is not technically lying when he says his budget proposes $4 T of deficit reduction. He is instead using one of two “tricks” to mislead the listener:

He is using a nonstandard 12 year timeframe to make his proposed deficit reduction appear a bit more than $1 trillion larger over the next decade than it is; and/or

He is misrepresenting a combination of already enacted deficit reduction with that which he proposes for the future. Re-read the quote up top and tell me if you think “and I’m willing to do more” suggests that he is proposing $4 trillion of future deficit reduction.

If Mr. Woodward is right, President Obama is intentionally using these numbers, these “tricks,” to mislead you. He wants to claim credit for as much deficit reduction as is in the Ryan budget, but he didn’t want to propose the spending cuts and/or tax increases to hit that target: “[T]he cuts were too severe. The progressive and liberal base would be deeply distressed.”

I know that this type of analysis is technical and can be challenging. According to the Woodward book, President Obama’s team is counting on that. We are, however, talking about an incumbent President who appears to be intentionally misleading voters about more than one trillion dollars (that’s one million million dollars) of hard policy choices that he has not actually made. I think that’s worth the effort to understand.

To President Obama the price of politics looks to be a bit more than $1 trillion over the next decade.

This is the second of two posts. Here is the first, a much shorter high-level version of the outline contained here.

This is my attempt to build a detailed outline of the economic speech President Obama gave in Cleveland yesterday (watch it).

I used his language in some parts, but in many parts these are his concepts expressed in my words, I hope to provide more clarity.

It won’t surprise regular readers that I disagree with much of this. I have tried not to let that cloud this summary.

Detailed outline of President Obama’s Remarks on the Economy

Cuyahoga Community College
Cleveland, Ohio
Thursday, June 14, 2012

I. Big choice — two paths

A. Choice / two fundamentally different visions.
B. Choice and debate are not about whether we need to grow faster, but instead about how to:

1. Create strong, sustained growth;
2. Pay down our long-term debt;
3. Generate good, middle class jobs so people can have confidence that if they work hard, they can get ahead.

C. Big decisions. Not new challenges. Problems more than a decade in the making.

D. Being held back by a stalemate over two different paths for our country. Election should is about resolving this stalemate.

II. Define & blame Republican theory for bad stuff.

A. Long before 2008 the basic bargain had begun to erode
B. Define Republican theory: cut taxes, no regs, market solves everything
C. Results of Republican theory: worked well for the rich, but prosperity never trickled down to the middle class.

III. Be patient.

A. Not your normal recession.
B. It has typically taken countries up to 10 years to recover from financial crises of this magnitude.
C. We’re in better shape than Europe.

1. Best way to grow the economy is from the top down;
2. Eliminate most regulations;
3. Cut taxes by trillions of dollars;
4. Strip down government to national security and a few other basic functions.

B. This failed theory created the fiscal problems we face now and the financial crisis that caused this weak economy.

C. Romney wants to return to and repeat this failed theory.

VI. Romney’s plan is bad for the middle class.

A. Keep Bush tax cuts in place and add another $5T in tax cuts on top of that.

1. 70% of those will go to >$200K/year, and >$1M/year will get an average tax cut of about 25%

A. I have cut taxes.
B. Fewer regulations than Bush in first three years.
C. Signed into law $2T of spending cuts.
D. Deficit reduction plan to slow health cost growth, not shift costs to seniors.
E. Domestic discretionary spending lowest share of GDP in nearly 60 years.

IX. I’m for keeping the American tradition of bipartisan government involvement in the economy.

A. Government is not the answer to all our problems, and I’m not proposing government run everything.
B. Romney and Republicans want to return us to no rules and unregulated market free-for-all.
C. America has succeeded not by telling everyone to fend for themselves, but by all of us pitching in, all of us pulling our own weight. That’s what I’m for.

Here is my attempt to outline the meaty 53 minute economic speech President Obama gave yesterday in Cleveland. I built this outline to help myself analyze the speech, then realized that others might find it useful. While it is true that little of the substance was new, this is nevertheless a serious policy speech that makes what the President and his advisors think is the economic part of their best case for reelection. I will take it seriously and recommend you do so as well — this isn’t just another blow-off stump speech. This is the theory of the economic case the way the President wants you to see it.

If you’re a student of economic policy I recommend you watch or read the whole speech. No summary or analysis can substitute for the candidate’s own words and presentation.

Here is my plan of attack: summarize first; then explain; then respond. Today is just the first step, the summary.

In some cases i use the President’s words, but I’m often using my own more colloquial language to express his arguments more clearly if I can. So in some cases these are his thoughts (I think) in my words. I have done my level best to capture his arguments in their most effective and convincing form, especially when I disagree with them. I will express my disagreements another time.

This post contains just the highest level outline. The next post contains a much more detailed outline. I recommend you skim this one, then read that one.

High level outline of President Obama’s Remarks on the Economy

Cuyahoga Community College
Cleveland, Ohio
Thursday, June 14, 2012

I. Big and fundamental choice — two paths.

II. Define & blame Republican theory for bad stuff.

III. Be patient.

IV. Take credit for progress / the good stuff.

V. Romney wants to repeat the failed experiment of the last decade.

VI. Romney’s plan is bad for the middle class.

VII. My plan is an economy built from a growing middle class. Race to the top.

VIII. I’m a centrist, look at my record.

IX. I am for keeping the American tradition of bipartisan government involvement in the economy.

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The Obama Administration claims their new budget contains $2.50 of spending cuts for every $1 of tax increases. Here is White House Chief of Staff and former Budget Director Jack Lew on Meet the Press yesterday:

We’ve seen from Republicans in–particularly Republicans in the House, but with Republicans generally, that they don’t want to be part of any plan that raises taxes at all. The president’s budget has $1 of revenue for every $2 1/2 of spending cuts. This can be done, but it can only be done when we work together.

Their 2.5:1 ratio is bogus. The President’s team is (1) playing a timeframe game and (2) counting interest savings from tax increases as spending cuts.

Contrary to Mr. Lew’s assertion, the President is proposing at least $1.20 of tax increases for every dollar of proposed spending cuts. The President’s budget locks in historically high spending levels and relies more on tax increases than spending cuts for the limited deficit reduction it proposes.

Table S-3 from the newly released President’s Budget starts measuring deficit reduction a year ago, in January 2011. The table shows $5.3 T of deficit reduction over the next ten years resulting from a combination of laws enacted last year and the President’s new proposals released in today’s budget.

The President’s budget is a set of policy proposals for the future. When most people hear the “The President’s budget has $1 of revenue for every $2 1/2 of spending cuts,” they think this ratio applies to the changes the President proposes for the future.

I will therefore split the OMB table and recalculate this ratio, ignoring spending cuts and tax increases that have already been enacted into law and looking only at future policy proposals. I argue this is the right way to do this ratio. Like the OMB table, this one shows deficit reduction for the next 10 years ($ in billions, 2013-2021).

Already enacted

New proposals

Total

spending cuts

1720

1254

2974

tax increases

1510

1510

interest effects

800

total deficit reduction

1720

2764

5284

spending / taxes

0.83

2.50

taxes / spending

1.20

Looking only at new proposals, the President’s budget proposes 83 cents in spending cuts for each dollar it proposes in tax increases. Or we could say the President’s budget proposes $1.20 in tax increases for each dollar in proposed spending cuts.

The gimmicks

The President’s team is playing at least two games to generate their 2.5:1 ratio:

They are cherry-picking their timeframe to make the ratio look at high as possible; and

They are counting all interest savings as spending cuts.

Why did they start measuring in January 2011? Because that was the start of the Republican Congress, because last year only spending cuts were enacted, and because that timeframe maximizes the spending increase to tax cut ratio.

Good rule of thumb: if you cut government spending or raise taxes by $100 over the next ten years, you’ll also save about $20 in interest costs. These interest savings show up as reductions in government spending even when they result from tax increases. If, for instance, the President proposed no spending cuts and $100 B of tax increases, he’d get scored with $20 B of interest savings which would show up as reductions in spending. Using Team Obama’s logic that would count as a 5:1 ratio of tax increases to spending cuts even though common sense would suggest the ratio is infinite because the President isn’t proposing to cut any spending.

The right way to measure this ratio is therefore to exclude the interest effects and to measure only the ratio of deficit effects of proposed policy changes. The Administration counts interest savings from tax increases as spending cuts to inflate their ratio.

The Administration may also be playing games with how they define spending cuts and tax increases. I have not yet looked into their details on this point.

This ratio is a stupid measure

Even when it’s not distorted by games like these, the ratio of spending cuts to tax increases is a misleading way to analyze fiscal policy for two reasons.

Both the numerator and the denominator measure a change rather than an absolute level. But for both spending and taxes the change that you measure depends on the starting point you pick. Even well-intentioned people can disagree on the right baseline from which to measure spending cuts or tax increases. In addition, it is easy to gimmick the starting point for either measurement to make the change look big/small as needed. Both the discretion involved in choosing spending and tax baselines and the opportunities for gimmickry mean that both the numerator and denominator of this ratio are at best somewhat arbitrary and at worst just made-up numbers.

What kind of ratio of spending cuts to tax increases you should want depends not only on your fiscal policy views, but also on the starting point. Most people would say that if government spending is historically high then it makes sense to rely more on spending cuts than tax increases. Saying we need “a balanced approach to deficit reduction” and using this ratio (even when properly calculated) presumes the current starting point for policy is good or at least reasonable. With government spending starting way above the historic average that’s a huge assumption.

The political strategy of emphasizing this ratio

I think that by using this distorted 2.5:1 ratio, the President’s team wants you to conclude:

that the President is a reasonable fiscal policy centrist who believes in reducing the deficit through a balance of spending cuts and tax increases;

that his proposed balance relies much more heavily on spending cuts than tax increases; and

that Congressional Republicans are therefore unreasonable and extreme for rejecting the President’s “balanced approach.”

When we look at the corrected ratio of $1.20 of tax increases for $1 of spending cuts, measured relative to a starting point of historically high government spending, we see the Obama Administrations actual fiscal strategy revealed.

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In advance of tomorrow’s State of the Union address I have been rereading President Obama’s major economic speeches. I had hoped to show a progression of argument, but that didn’t pan out. Instead two things jumped out at me: the President’s primary economic problem definition has varied widely over time, and his deficit message has changed even more. I will attempt to summarize each in chronological order.

Here is how President Obama has defined America’s primary economic problem and his policy response. In each case the language is my paraphrase of the President’s message.

[2009-10] I inherited a mess – an economy in freefall. My actions prevented a depression.

[early 2009] We had a bubble-and-bust economy. I am moving the economy from one built on financial bubbles to one built on a “new foundation” of financial reform, education, renewable energy, health care, and deficit reduction.

[early 2011] International competition: China and India have better new infrastructure than we do. Let’s spend money on infrastructure, education, health care, and green jobs.

[summer 2011] I want to fix the long-term deficit.

[fall 2011-present] Income inequality is a huge problem and has been for decades. The rich are sticking it to the middle class. I’m for the middle class, so let’s raise taxes on the rich.

While the above list spans a fairly wide range, the arguments are at least roughly consistent with one another. In contrast the President’s policy and message on the deficit has ranged all over the map.

[2009] We need to fix the economy first. Worry about the deficit later.

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For months a common story line in the budget debate has been that a bipartisan deficit reduction deal was impossible as long as Republicans refused to raise taxes. President Obama, Congressional Democrats, and many observers asserted that it would be impossible to solve the deficit problem until and unless Republicans agreed to raise taxes. They further argued that if a deficit reduction deal did not come together, Republican intransigence on this point would be the reason why.

The specific argument was that the deficit could only be reduced through a combination of spending cuts and tax increases. This logic was applied to the Super Committee’s $1.2 – $1.5 T deficit reduction target.

The argument that tax increases are necessary for deficit reduction is not arithmetically true – it is quite possible to completely and permanently reduce, or even eliminate, the budget deficit only by cutting spending. In fact it’s not all that hard to do.

It may, however, be legislatively true that in a politically balanced Washington like we have now, a bipartisan deal with Democrats that does not raise taxes is impossible because Democrats will not agree to deep spending cuts as long as Republicans refuse to raise taxes.

The stalking horse for this argument is Grover Norquist, head of the antitax group Americans for Tax Reform (ATR). ATR’s position is that total federal income tax revenues should not be increased. A deficit reduction package consistent with ATR’s position could increase taxes, it just couldn’t increase income taxes. It could eliminate income tax deductions and credits, but to be consistent with ATR’s view, the higher income tax revenues that result would need to be used in full to cut income tax rates, so that the total income tax burden did not increase. (I use the phrases “total income taxes” and “net income taxes” interchangeably.)

Many DC Democrats argued that Mr. Norquist was really in charge, and that Congressional Republicans were unwilling to cross ATR for fear of political retribution. If there was no deficit reduction deal, we were told, it would be because Grover Norquist, Americans for Tax Reform, and Congressional Republicans all refused to agree to net income tax increases.

The most significant element of the failed Super Committee negotiation is that Republicans offered to cross the no-net-tax-increase line in exchange for structural entitlement reform or structural tax reform and a permanent answer on tax rates. The six Super Committee Republicans proposed a deficit reduction package that would increase net income taxes by about $250 B, plus another $40ish B in higher revenues that would result from correcting the way that inflation is measured. When you add in other “receipts” (which are technically different from tax “revenues”) from auctioning telecommunications spectrum, raising defined benefit pension fees, and asset sales, plus the dynamic effects of high revenue resulting from greater GDP growth (as scored by CBO) that would result, the “tax” (technically, non-spending) component of the Super Committee Republican offer was in the $500 B ballpark.

The six Super Committee Republicans made two offers to Super Committee Democrats:

We will agree to these tax increases if they are packaged with structural entitlement reforms like the premium support system for Medicare assumed in the House budget resolution and if these tax rates are made part of permanent law; or

We will agree to these net tax increases if they are part of a pro-growth tax reform that permanently lowers marginal income tax rates and if they are packaged with significant reductions in entitlement spending growth through incremental, non-structural changes.

This is a stunning move, as almost all Congressional Republicans had previously been unwilling to increase net taxation. Speaker Boehner signaled his willingness to cross the line in his Grand Bargain negotiations last summer with the President. Senator Tom Coburn proposed something similar over the summer, and first crossed the line when he tried to repeal/dial back the ethanol tax credit without using the revenues raised to cut other taxes. Now the rest of Congressional Republicans (or at least the six key Rs on the Super Committee) have joined them. That is a fundamental shift in the budget debate.

The details of the second Republican offer are significant. The SC Republicans proposed to lower marginal income tax rates while increasing average income tax rates. They proposed to eliminate income tax deductions and credits, use some of the revenues raised to lower tax rates, and use some of the revenues raised to reduce the deficit. It’s this last part that is new and extraordinary coming from Congressional Republicans.

This Republican shift means that the earlier narrative that deficit reduction is impossible because Republicans refuse to raise taxes is now invalid. It also invalidates the argument that Congressional Republicans refuse to cross Grover Norquist and Americans for Tax Reform. As best I can tell, the Republican offer is inconsistent with ATR’s position.

I have mixed feelings about this strategic shift:

As a policy matter I hate it. I don’t want to raise any net taxes, period. I strongly prefer to reduce the deficit only by cutting spending, and I fear that in the long run the higher revenues will be used not to reduce the deficit, but instead to finance higher government spending. My biggest concern is that Congressional Republicans might trade permanent tax increases for only temporary cuts in spending growth. If they do, then we will repeat this dynamic several years down the road, only from a starting point of bigger government.

I recognize that legislating in a politically balanced Congress forces compromise, and that one often has to accept things one hates in pursuit of a larger goal. I assume the Republican negotiators thought that this was both the best deal they might get, and that it was better than simply kicking the deficit can down the road another year. Based on what I know of the six Super Committee Republicans, Speaker Boehner, and Senator Coburn, I think most if not all of them hate net tax increases as much as I do.

This shift should advantage Republicans as they compete for the hearts, minds, and votes of those centrists and moderate Democrats who think that spending cuts must be accompanied by tax increases.

Having lost their principal line of attack, the President’s team and Congressional Democrats have therefore moved to two fallback arguments:

Republicans would not raise taxes enough; and

Republicans refused to raise taxes on the rich.

Over the next year you will often hear the word “balance,” implying that there is some substantive or moral equivalence between the particular tax increases that Democrats want and the entitlement spending cuts that are arithmetically necessary to solve our long-term deficit problems. I reject the balance concept and its underlying logic, but what’s more important is that you understand the linkage between the balance argument and the earlier, now invalid, line of attack. Every time you hear “balance” as a critique of the Republican position, you should think “DC Democrats are conceding that Republicans have put net tax increases on the table. They just want bigger tax increases and smaller spending cuts than Republicans offered.”

The second argument, that Republicans refuse to raise taxes on the rich, is now incorrect. The Super Committee Republican offer would not just have increased net taxes, as well as net income tax revenues. It also would have increased taxes paid by those with incomes over $200,000. The reform proposed by Super Committee Republicans would have resulted in net tax reductions for income classes below $200,000, and net tax increases for income classes above $200,000 (and above $100,000 by 2021). It would have made the tax code more progressive than it is today.

The net tax cuts for lower and middle-income taxpayers would result from the Republicans’ proposed rate cuts. The net tax increases for upper-income taxpayers would result from eliminating tax deductions and credits that disproportionately affect “the rich,” and that would more than offset the revenue lost to the government by cutting top marginal rates. In effect, the Super Committee Republicans proposed that the rich pay higher taxes as part of a deficit reduction package, while lowering the marginal tax rates that all income taxpayers would face, to get the incentives to work and invest right.

The tax attacks on Republicans therefore look like this:

Republicans refused to raise taxes as part of a deficit deal. No longer valid.

As you follow the deficit reduction debate over the next year, it will be important to remember how significantly the Super Committee Republicans changed the negotiating playing field during these negotiations, and how their offer has changed the nature of the fiscal policy debate.

Using the mantra “we can’t wait,” the President will highlight executive actions that his Administration will take. He’ll continue to pressure Congressional Republicans to put country before party and pass the American Jobs Act, but he believes we cannot wait, so he will act where they won’t.

Mantra? That’s a signal to the President’s political allies: please repeat this phrase.

The new policy will allow some homeowners who are underwater on their mortgages to refinance at lower interest rates. It does this by waiving some fees and shifting a bit of incremental risk to taxpayers through Fannie Mae and Freddie Mac, which are now in effect wholly-owned subsidiaries of the U.S. government.

This is an incremental expansion of an existing housing refinance program. If effective, it will help some more underwater taxpayers with fixed-rate mortgages, at some risk of increased cost to taxpayers. The Administration is using phrases like “may help up to 900,000 homeowners.” Key words are may and up to.

Mortgage refinancing policies are quite hard to do at scale. If recent history is a guide, this program may help a few tens of thousands of homeowners. That’s a trivial macroeconomic impact. Even if it does help 900,000 homeowners, the effects will be small enough that they won’t show up on most macro forecasts. Its greater benefit may be political: it creates another talking point for the President.

If this were a huge program that would help several millions of underwater mortgages at an enormous cost to the taxpayer, there would be some interesting policy tradeoffs worth exploring. In particular, are the macroeconomic benefits of helping these homeowners refinance and potentially escape from their underwater mortgage worth the increased costs to the taxpayer and the inequities created in which one group of Americans subsidize others whose [housing] investments went bad? These same tradeoffs exist with this new policy, but I wouldn’t lose sleep over them when the policy is small. Still, Congress should ask FHFA for detailed estimates of the increased costs and risks to the taxpayer.

I am more intrigued by the President’s new mantra, “We can’t wait.” The logic is “We can’t wait for a Republican Congress, so we’re acting with every tool we have to improve the economy. We admit it’s not enough, but that’s [Republicans in] Congress’ fault.” Never mind the near-comatose Democratic-majority Senate that is neither marking up the President’s proposals in committee nor taking up alternative House-passed economic growth bills.

The President’s argument is, in effect, “We can’t wait for democracy.” The Constitution gives the power of the purse to the Congress, not the President. If the Congress doesn’t want to enact his proposals, then it shouldn’t, and that’s how the system is supposed to work.

I am not surprised that the President is using the legislative flexibility he has to maximum effect. I am a bit surprised that he sees a political benefit in framing himself as an Imperial leader who can and should ignore democratic processes. This seems inconsistent with Democratic party rhetoric in recent years.

Democracy is so inconvenient when your party controls the Presidency and the opposition can block your legislative agenda.

Response:As John Taylor points out, even if you believe this, you can’t forget the word temporarily. The Administration refuses to produce their own estimates of the projected impact of the President’s new stimulus proposal, presumably because they burned themselves with their January 2009 estimate of the first stimulus. They are instead leaning heavily on two private forecasts, by Macro Advisers and Democratic economist Mark Zandi. (I frequently use MA’s forecasts in my work.) The Administration forgets to mention that both these forecasts project only a temporary increase in GDP and employment growth from the President’s proposal. Both predict that with the President’s new stimulus proposal, the economy would be stronger than it otherwise would be in 2012, but weaker than otherwise in 2013 and 2014 after the new policies have ended.

Both forecast a decline of at most 1 percentage point in the 2012 unemployment rate. Many conservatives are skeptical the impact will be even that large.

Q: Should Congress enact a proposal that includes deficit-increasing policies of $450 B that will, at best, temporarily reduce the unemployment rate by one percentage point for one year? Whatever spending cuts and/or tax increases are enacted to offset this deficit increase could otherwise be used to reduce future budget deficits.

Argument: Temporary bonus expensing will help the economy grow.

Response: The same is true of temporary “bonus expensing,” in which Congress provides the ability for a firm to deduct from taxable income more business investment in the next year. Like the President’s proposal, this is a timing shift. As a temporary proposal, it would accelerate business investment into 2012 that would otherwise occur in 2013 and 2014.

If we were only looking at a projected one-year dip in GDP and job growth, then it might make sense to “borrow” growth from future years and bring it into 2012. But when the projection is for slow growth over the next few years, these timing shifts don’t help unless you’re up for re-election in 2012.

I like the idea of permanent expensing of business investment. Given current forecasts of slow economic growth over the next few years, I don’t see what is gained by this temporary timing shift.

Argument: Austerity measures will cause a fiscal contraction.

Response: Some on the Left argue that policies to address America’s expanding government and exploding budget deficits will cause a short-term fiscal contraction. They make a traditional Keynesian argument: the economy needs more fiscal stimulus now, and if we cut spending too much we’ll hurt the recovery. If you buy the traditional Keynesian fiscal stimulus argument, then this is indeed a theoretical concern.

This will never, ever happen, for both a policy and a political reason. Deficit-reducing policy changes are always phased in over time, and the scored deficit reduction from both spending cuts and tax increases grows (linearly) with time. The spending cuts and/or tax increases in the first couple years of a typical deficit reduction package are trivially small, a rounding error compared to a $15 trillion annual GDP.

And do you really think that politicians who are up for reelection next year (the President, 435 House Members and 33 Senators) will choose to concentrate policy and political pain in the next year by front-loading the spending cuts and/or tax increases? Even if the natural timing of deficit reduction legislation did not delay the fiscal impact, the self-preservation instinct of politicians eliminates any practical risk of a large deficit-reduction package harming the economy in the short run.

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If you have been following my posts you understand that the Budget Control Act creates a new 12-Member Congressional Joint Select Committee to negotiate and agree to at least $1.2 T in deficit reduction by November 23rd. If the Committee fails or if it makes recommendations but they don’t become law, then plan B is triggered.

Plan B is an automatic sequester that cuts $1.2 T over the nine-year period 2013-2021 from all discretionary and some mandatory spending programs.

Many big entitlements are exempted from this sequester, including Social Security, Medicaid, most welfare programs, refundable tax credits, veterans benefits, and civilian and military retirement benefits. This is because the Budget Control Act did not write its own new set of exemptions from the mandatory sequester. It instead referenced an exemption list in an earlier law.

On Monday I missed the new Affordable Care Act (ObamaCare) mandatory spending. While the biggest spending components of this law would be exempt from the sequester, significant parts of it would be subject to cuts if the Joint Committee fails.

I am fairly confident that the premium subsidies, the Medicaid expansion and other Medicaid-related spending increases, and the SCHIP reauthorization would be exempt from the new sequester, because they expand programs that were explicitly exempted in that earlier referenced law. Those are the biggest dollar components of ObamaCare.

But the Affordable Care Act was enacted after that earlier law, so any new spending programs should be on the sequester’s chopping block if the Joint Committee fails. As best I can tell, this includes:

National Health Service Corps (Section 10503 (b)(2)): A total of $900 million in mandatory funding for 2013, 2014, and 2015.

Maternal, Infant, and Early Childhood Home Visiting Program (Section 2951): A total of $800 million in mandatory spending in 2013 and 2014.

Personal Responsibility Education Programs (Section 2953): A total of $150 million for 2013 and 2014.

School Based Health Centers (Section 4101): $50 million in FY 2013.

Patient Centered Outcomes Research Trust Fund: A total of $1.05 billion between 2013 and 2019.

I am unsure whether the CLASS Act spending is vulnerable, and I’m not certain on the risk adjustment money listed above, either.

Remember that “vulnerable to sequester” means “will be cut somewhat,” rather than “will be wiped out.” In an earlier example I said that if the Joint Committee failed completely, a $1.2 T spending cut would cut nondefense discretionary and other mandatory programs 8%. So think of this in the roughly 6-8% cut range if the Committee fails.

Consequences

I see seven big consequences of this:

Elements of ObamaCare spending are now in the mix to be cut. I like this; liberals will hate it.

This injects ObamaCare spending squarely into the Joint Committee negotiations, and not just the vulnerable parts. I hope Republicans appointed to the Joint Committee will argue for repeal of these big new entitlements. I think Congressional Republicans erred by leaving it out of the last battle.

It also brings ObamaCare back into the broader fiscal policy and election debate.

Nondefense appropriations would bear a slightly smaller share of any triggered cut. Democratic appropriators may actually like this news, though I can’t imagine they’d say so publicly.

This shifts leverage in the Joint Committee negotiations toward Republicans. How much of a shift depends on how substantively and politically valuable these programs are to Congressional Democrats and the White House. Democrats now have one more reason to avoid the triggered sequester, increasing leverage for Republicans in those negotiations and making it a bit easier for them to push back on demands for tax increases.

While the core spending of ObamaCare would be exempt, the cost-sharing subsidies and risk adjustment payments would (I think) be subject to cuts. Beneficiaries and insurers would be harmed. Those are big policy consequences. I don’t know whether cuts in risk adjustment payments would be big enough to mess with the complex insurance regulatory structure in the Affordable Care Act. Insurers argue that risk adjustment payments are essential to making guaranteed issue and community rating work.

Senior White House officials had to know that components of ObamaCare would be subject to triggered cuts if the Joint Committee fails. There is no way they could have missed this. I wonder if they told their Democratic allies in Congress about this risk before the vote? Even if you want to argue that these aren’t the biggest spending components of ObamaCare, the effects on leverage within the Joint Committee negotiations could be a huge deal.